The Political Economy of Health Care: Technology and Public R&D

Alberto Batinti

Major Professor: Thomas Stratmann, PhD, Department of Economics

Committee Members: Daniel Houser, Alexander Tabarrok, Roger Congleton

Carow Hall, #1A
February 13, 2012, 09:30 AM to 07:30 AM

Abstract:

Social insurance programs have grown rapidly in the post-World War II period, after a period of comparative stability in their size relative to GDP from the late 19th century until the first half of the 20th century. My dissertation focuses on one of the main drivers of the growth of social insurance, namely the relationship between technological advance and the demand for healthcare insurance programs.  Technology has in fact long been recognized as an important driver of healthcare costs and expenditures.

The dissertation extends the political-economy literature on healthcare and healthcare R&D by taking greater account of the interdependencies between R&D and the demand for social insurance. In order to find a political equilibrium, I used a median voter model of the demands for social healthcare and public R&D.  I avoid the cycling problem common to multidimensional policymaking in deterministic election models assuming that healthcare decisions were adopted under institutions that generate an equilibrium with fewer restrictions on voter preferences. In particular, I assumed that citizens vote sequentially first on public healthcare and then on public R&D.  It turns out that even if preferences for social healthcare are single peaked, preferences for R&D may not be. If R&D’s effect on healthcare’s price is increasing and convex, then policy preferences for public R&D are single peaked.  The theoretical analysis and the associated estimates shed light on a variety of issues that the previous literature did not pay significant attention to. In particular, three main innovations to the current literature are included.

First, I extend the analysis from the demand of socialized medicine to the demand for socialized healthcare R&D.  Thus technology is endogenous and it is driven by political decisions.  The demand for R&D is derived within an insurance mechanism framework. Interests very similar to those that drive the demand for insurance (private or social) also drive the demand for healthcare R&D.  I find the solution that a median voter equilibrium exists if R&D has a positive and convex effect on healthcare costs.

Second, this research fills a gap between the empirical and theoretical literatures.  On the one hand the empirical literature has focused mainly on rising healthcare costs and on the expenditure increasing effect that technological innovation has on healthcare costs. On the other, the theoretical literature models the underlying trade-off from R&D investment in a standard investment-type framework between actual foregone consumption and future increase in benefits from innovation stemming from the resources dedicated to R&D.  This investment framework undoubtedly shed some light on the main incentives and costs in acquiring new research and development, however it misses an important trade-off: the one between healthcare costs and benefits from technological innovation.  Moreover, little of that literature imbeds the decision in a microeconomic-based model of political decision making.

Third, I introduced a positive political economy point of view consistent with the public choice approach. Rather than focus on normative considerations, on the welfare effects of available technological introduction into the healthcare market, the dissertation attempts to explain why such innovations occur.

I finally estimated the demand equations for public R&D and for public and private healthcare, both in structural and reduced forms. In general the results confirm the underlying intuition that R&D can be modeled as a form of insurance.  Healthcare R&D is driven by the same factors that drive demand for healthcare insurance: income and morbidity. The empirical results show that the variables and relationships focused on in the model can account for both the demand for R&D and for healthcare.  The results suggest also that the median voter, given his or her benefits and tax price,    believes that in general the cost of R&D is worth the price.

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